Beware Of Short Sales

Many people who invested in real estate at the end of the boom are in financial trouble. I have been getting more and more inquiries from individual investors facing foreclosures of their investment properties. Often, people tell me they are discussing "short sales" with their mortgage lenders. In a short sale, the lender allows the house to be sold for less than the mortgage balance. The borrower avoids a deficiency judgment. The lenders would rather get most of their mortgage through a sale arranged by the owner then take the property back at a foreclosure sale. Borrower should beware of short sales.

The problem for the borrower in a short sale is that the difference between the payment to the mortgage company and the full mortgage balance is a forgiveness of debt for tax purposes. The mortgage company is forgiving the debtor’s liability for the deficiency. The IRS considers forgiven debt to be taxable income to the borrower. The mortgage lender may send the borrower a Form 1099 for the amount of the deficiency. Most borrowers who cannot afford mortgage payments can even less afford additional tax liability. Owing money to the IRS is usually worse than owing money to a mortgage lender. Many mortgage lenders will not pursue debtors for deficiency judgments; the IRS will always pursue unpaid taxes. For that reason, most borrowers will fare better by letting their property go to foreclosure, even if the foreclosure may result in a deficiency liability.

posted by Jonathan Alper, bankruptcy and asset protection attorney, Orlando, Florida

Comments

[Lynn]

If the house in question is a primary residence and has been such for a number of years, this may have little impact on taxes. Aren't those capital gains exempt from taxes? I would like Mr. Alper to comment on the situation I described to confirm or correct my information.

[Jami]

I short sold my house end of sept 09 through USDA. I am now trying to get the bank to work with a settlement on the 50k differance. I am not able to get any answers. What should I do. And I am getting married, is He going to be responsible for the remaining balance or can they go after him. since in FL.

[Simone Griffin]

If you agree to do a Short Sale the lender will forgive your deficieny's and it is better for your credit. A Short Sale will effect your credit for only two years rather than a Foreclosure for seven or more. You need to be behind more than 3 month's to do a Short Sale. We can help you and our services are free.

[Laura]

Can a short sale be done on a second home?

[Steve]

I am in the process of selling my condo in Broward County Fla. by a real estate agent as a short sale. My bank is GMAC mortgage. I am completely upside down with an outstanding debt after the sale of approx. $205,000. According to GMAC, they will forgive this debt but they would not give me an answer as to whether of not they will 1099 me. Does anyone have an answer to this? They say it depends on local law. I find this hard to beleive since the 1099 is Federal. Please help me :(

[Sarah Williams]

I am just beginning the pursuit of a short sale and the property has been listed for one month. I did not make my mortgage payment the beginning of August and will continue in this manner. I have been told by someone at a title company who is experienced in handling short sales with Wachovia that the "package" will not be filed with Wachy until three months have elapsed.
1. How do I know if Wachy will make me sign an unsecured note for the difference between the purchase price and the selling price?
2. Does the Mortgage Foreclosure Relief Act of 2007 cover short sales or just foreclosures?
Appreciate your advice.
Thank you.

[James]

i am a renter in the keys and my landlord is selling this house through a different company then what rented the house from, and they still want last months rent even though we have a good chance of having to move, what are my options?

[Gwen]

foreclosure and short sale you will have to pay IRS as both have consequences of "Debt Forgiveness" please review the IRS rules first before you decide. The lender has to issue 1099-C to you and even if you do not get the IRS says you still have to file and disclose. Not getting a 1099 is not an excuse not to file. My fear is all these people doing short sales and letting properties go into foreclosure. I am a realtor in florida and people are doing short sales without consulting their CPA or an attorney first...which is a big no no.

[Blaison]

I just bumped into this article. It needs to be updated, laws have changed. I'm not a CPA or attorney but my understanding is that if it's primary residence then you don't have to pay taxes under new mortgage relief act 2007. Short sale is better than foreclosure.

http://BayAreaShortSaleSpecialist.com

[lui]

Sharon according to jimbo's link to the IRS if it was an income producing investment property you should be able to offset the capital loss with the imputed income.